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Banks: You can’t live without them; You can’t shoot them. But you sure wish you could. I looked up “scandal” in the dictionary today. It said, “see ‘Banks'”.
The European Commission has revealed that it has issued a Statement of Objections to 13 different financial institutions, accusing them of colluding “to prevent exchanges from entering the credit derivatives business between 2006 and 2009.” Letters were also sent to Markit Group Ltd. and the International Swaps & Derivatives Association (ISDA) whom the commision alleged were also participants in the scheme. According to the Commission’s press release this morning, Commission Vice President in charge of competition policy Joaquín Almunia said: “It would be unacceptable if banks collectively blocked exchanges to protect their revenues from over-the-counter trading of credit derivatives. Over-the-counter trading is not only more expensive for investors than exchange trading, it is also prone to systemic risks.”
According to the worldwide exchange intelligence service, MondoVisione, a Credit Default Swap (CDS) “is a derivative contract designed to transfer the credit risk (i.e. the risk of default), linked to a debt obligation referenced in the contract. CDS are used by investors for hedging and investing. As a hedge a CDS provides protection against the credit risk arising from holding debt instruments. As an investment vehicle CDS can be used to express a view on the future development of the debt issuer’s creditworthiness and earn a profit if the view is correct.”
MondoVisione also explains that CDS are “by far” the most important of all credit derivative (emphasis mine). According to the EC’s press release, total current active CDS contracts total more than €10 trillion. Some two million contracts are currently active. The letters were sent in response to an investigation initiated based on similar claims by the Chicago Mercantile Exchange and Deutsche Börse that their efforts to enter the CDS market were effectively blocked, specifically, by Markit and ISDA. The rub comes in that Markit Ltd. is owned by the banks in question and ISDA is controlled by them.
Following an investigation that began in April 2011 and continued through March 2013, the EC reported that it has taken “the preliminary view that the banks acted collectively to shut out exchanges from the market.” The clear reasoning for this is because the banks are models of integrity and trustworthiness at the highest levels. (Gotcha! Just seeing if you were paying attention.) The obvious reason for the collusion was to keep the number of CDS players to a minimum with the ultimate goal of ensuring that the current players’ share of the potential profits would not be diminished, much the same as crime syndicates try to preserve their own “territory”.
The institutions receiving notices were Bank of America, Barclays, JP Morgan Chase, Bear Stearns, BNP Paribas, Citigroup, Credit Suisse, Deutsch Bank, Goldman Sachs, HSBC, Morgan Stanley, RBS, and UBS AG. Should we really be shocked? Did we really think that we had seen it all? Have we not learned that when a bank is dirty that it is dirty through and through? What puzzles me is that the EC website is pushing for a cashless society. How much do you think we’ll be able to trust these crooks when we really can’t see them?
If, after all is said and done and the banks are found to be guilty, the EC has the authority to issue fines to each guilty entity of up to ten percent of their annual worldwide turnover. The EC mentioned nothing of prison terms. They ought to.
To read the full EC press release, click here.
